Is Changchun Yidong Clutch CO.,LTD's (SHSE:600148) Stock On A Downtrend As A Result Of Its Poor Financials?

Changchun Yidong ClutchLTD (SHSE:600148) has had a rough week with its share price down 11%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Changchun Yidong ClutchLTD's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Changchun Yidong ClutchLTD is:

3.5% = CN¥21m ÷ CN¥603m (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.04 in profit.

Check out our latest analysis for Changchun Yidong ClutchLTD

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Changchun Yidong ClutchLTD's Earnings Growth And 3.5% ROE

It is quite clear that Changchun Yidong ClutchLTD's ROE is rather low. Even compared to the average industry ROE of 8.5%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 41% seen by Changchun Yidong ClutchLTD was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Changchun Yidong ClutchLTD's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 9.3% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Changchun Yidong ClutchLTD is trading on a high P/E or a low P/E, relative to its industry.

Is Changchun Yidong ClutchLTD Using Its Retained Earnings Effectively?

Changchun Yidong ClutchLTD's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 52% (or a retention ratio of 48%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 2 risks we have identified for Changchun Yidong ClutchLTD visit our risks dashboard for free.

Additionally, Changchun Yidong ClutchLTD has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning Changchun Yidong ClutchLTD. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Changchun Yidong ClutchLTD's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.